Justices Hear Case Tied to Stanford
Plaintiffs Argue Financial and Law Firms Helped Aid $7 Billion Ponzi Scheme
By JESS BRAVIN CONNECT
WASHINGTON—A case brought by victims of R. Allen Stanford's $7 billion Ponzi scheme posed a quandary for Supreme Court justices, in part because the Securities and Exchange Commission argued that siding with the victims would hamstring federal oversight of the stock markets.
R. ALLEN STANFORD
The plaintiffs want to sue law and financial firms that worked with Stanford Investment Bank, alleging they aided Mr. Stanford's scheme.
In 2006, the justices held that federal law blocks class-action lawsuits over fraud related to securities sales if those sales fell under the regulatory authority of the SEC. In order to maintain broad authority over the markets, the SEC has argued for an expansive reading of its jurisdiction, which the court has held includes misrepresentations "in connection with the purchase or sale of a covered security."
That legal position made the SEC a strange bedfellow of companies that worked with Mr. Stanford's operation, including SEI Investments Co. SEIC -1.88% and Willis Group Holdings, WSH -1.14% and the law firms Proskauer Rose LLP and Chadbourne & Parke LLP. These firms, which deny wrongdoing, are seeking to have the victims' lawsuit dismissed under the 1998 Securities Litigation Uniform Standards Act, which bars class-action claims filed under state law.
The Ponzi scheme worked by selling investors fixed-rate certificates of deposit in Mr. Stanford's Antigua-based bank. Investors were falsely told that the certificates were backed by safe, liquid investments in the stock market.
In fact, the fraud depended on using funds from new investors to pay off earlier ones who withdrew their money.
On Monday, the first day of the Supreme Court's 2013-14 term, a lawyer representing the defendants, Paul Clement, told the justices that the Stanford CDs were, in effect, sold as a vehicle by which to reap returns from stocks. The lawsuit was therefore barred under the high court's precedents, he said.
If Mr. Stanford falsely promised to purchase covered securities for the benefit of the plaintiffs, Mr. Clement said, then that would meet the standard for SEC jurisdiction, namely that the fraud happened "in connection with" a security sale.
But several justices suggested they were worried about adopting a definition that was too broad. Justice Elena Kagan offered an example of a prenuptial agreement in which one spouse promised to sell Google Inc. GOOG -1.39% stock to buy a home. "Is that covered by the securities laws now?" she asked.
Elaine Goldenberg, representing the government, told the court that the SEC's jurisdiction was triggered by frauds that diminish investor confidence, something essential for the stock markets to operate.
Justice Anthony Kennedy suggested that many actions might diminish investor confidence without properly triggering an SEC investigation. "If you went to church and heard a sermon that there are lots of people that are evil, maybe then you wouldn't invest," he said.
A lawyer for the plaintiffs, Thomas Goldstein, argued that the Stanford fraud wasn't "in connection with" the sale of securities because the victims weren't the ones who would have bought the fictitious shares. But some justices suggested that such a rule could effectively immunize some frauds from SEC enforcement.
"If someone tells me…'Give me the money, I will buy securities for myself and give you a fixed rate of return later,' I think that's 'in connection with' the purchase and sale of securities even though it's not legally purchased for my benefit," said Justice Sonia Sotomayor.
A decision is expected before July.
Plaintiffs Argue Financial and Law Firms Helped Aid $7 Billion Ponzi Scheme
By JESS BRAVIN CONNECT
WASHINGTON—A case brought by victims of R. Allen Stanford's $7 billion Ponzi scheme posed a quandary for Supreme Court justices, in part because the Securities and Exchange Commission argued that siding with the victims would hamstring federal oversight of the stock markets.
R. ALLEN STANFORD
The plaintiffs want to sue law and financial firms that worked with Stanford Investment Bank, alleging they aided Mr. Stanford's scheme.
In 2006, the justices held that federal law blocks class-action lawsuits over fraud related to securities sales if those sales fell under the regulatory authority of the SEC. In order to maintain broad authority over the markets, the SEC has argued for an expansive reading of its jurisdiction, which the court has held includes misrepresentations "in connection with the purchase or sale of a covered security."
That legal position made the SEC a strange bedfellow of companies that worked with Mr. Stanford's operation, including SEI Investments Co. SEIC -1.88% and Willis Group Holdings, WSH -1.14% and the law firms Proskauer Rose LLP and Chadbourne & Parke LLP. These firms, which deny wrongdoing, are seeking to have the victims' lawsuit dismissed under the 1998 Securities Litigation Uniform Standards Act, which bars class-action claims filed under state law.
The Ponzi scheme worked by selling investors fixed-rate certificates of deposit in Mr. Stanford's Antigua-based bank. Investors were falsely told that the certificates were backed by safe, liquid investments in the stock market.
In fact, the fraud depended on using funds from new investors to pay off earlier ones who withdrew their money.
On Monday, the first day of the Supreme Court's 2013-14 term, a lawyer representing the defendants, Paul Clement, told the justices that the Stanford CDs were, in effect, sold as a vehicle by which to reap returns from stocks. The lawsuit was therefore barred under the high court's precedents, he said.
If Mr. Stanford falsely promised to purchase covered securities for the benefit of the plaintiffs, Mr. Clement said, then that would meet the standard for SEC jurisdiction, namely that the fraud happened "in connection with" a security sale.
But several justices suggested they were worried about adopting a definition that was too broad. Justice Elena Kagan offered an example of a prenuptial agreement in which one spouse promised to sell Google Inc. GOOG -1.39% stock to buy a home. "Is that covered by the securities laws now?" she asked.
Elaine Goldenberg, representing the government, told the court that the SEC's jurisdiction was triggered by frauds that diminish investor confidence, something essential for the stock markets to operate.
Justice Anthony Kennedy suggested that many actions might diminish investor confidence without properly triggering an SEC investigation. "If you went to church and heard a sermon that there are lots of people that are evil, maybe then you wouldn't invest," he said.
A lawyer for the plaintiffs, Thomas Goldstein, argued that the Stanford fraud wasn't "in connection with" the sale of securities because the victims weren't the ones who would have bought the fictitious shares. But some justices suggested that such a rule could effectively immunize some frauds from SEC enforcement.
"If someone tells me…'Give me the money, I will buy securities for myself and give you a fixed rate of return later,' I think that's 'in connection with' the purchase and sale of securities even though it's not legally purchased for my benefit," said Justice Sonia Sotomayor.
A decision is expected before July.
For a full and open debate on the Stanford Receivership visit the Stanford International Victims Group - SIVG official forum http://sivg.org/forum/
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